Question

The principles of comparative advantage and specialization apply to trade between countries. *

True

False

Answer 1

Sol:

The theory or the principle of comparative advantage was given by David Ricardo which states that two countries will specialise in the production of the commodities in which it has higher comparative advantage than the other. In other words, trade should take place between two countries when country A incurs a comparatively lower costs in the production of one good as compared to country B. Hence,country A should export that commodity to the country B and import the commodities in which it has comparative disadvantage. This stands in complete contrast to the absolute advantage theory given by Adam Smith referring to absolute differences in costs of commodities as the primary reason behind trade.

Hence, the above statement is true that principle of comparative advantage and specialisation applies to Trade between countries.